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Employment Alert

Securities Litigation Alert

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7 MAY 2013A cura di:

The increasing number of whistleblowers and whistleblower retaliation claims plus the evolving multi-faceted nature of anti-retaliation law require employers to take enhanced care when contemplating adverse action against an employee who may qualify for whistleblower status.

With the Dodd-Frank whistleblower bounty program maturing, the number of whistleblowers and whistleblower retaliation claims is bound to increase.

The Securities and Exchange Commission reported receiving approximately 3,000 tips in its last fiscal year, and recent cases and pronouncements by the SEC highlight the need to carefully assess potential retaliation issues before taking employment action against a self-styled whistleblower.

Overview of the SEC Whistleblower Program

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC may pay rewards to individuals who provide the SEC with information about a possible violation of the federal securities laws that “has occurred, is ongoing, or is about to occur” at companies required to report to the SEC. The SEC may provide monetary compensation to individuals who voluntarily provide original information (i.e., previously unknown to the SEC) leading to a successful SEC enforcement action resulting in sanctions exceeding US$1 million. The individuals may receive between 10 and 30 percent of the amount collected in the SEC action or a related action brought by the US Department of Justice, regulatory agencies (such as the Federal Deposit Insurance Corporation), self-regulatory organizations (such as FINRA) and state attorneys general in criminal cases.

The program encourages whistleblowers to report possible violations to internal compliance departments by, for example, crediting whistleblowers who report internally through a company’s internal whistleblower, legal or compliance procedures before or simultaneously with reporting to the SEC and, conversely, by considering decreasing a whistleblower’s reward when the whistleblower interfered with internal compliance and reporting systems. Although Dodd-Frank undoubtedly incentivizes whistleblowers to report their employers, when a self‑styled whistleblower reports issues internally, that reporting often occurs before, during or after a company is considering taking adverse employment action against the employee, potentially implicating a variety of protections designed to discourage retaliation against whistleblowers.

Overview of anti-retaliation protections

Dodd-Frank’s statutory predecessor, the Sarbanes-Oxley Act, provides whistleblower protection for employees of publicly traded companies by prohibiting employers from “discharg[ing], demot[ing], suspend[ing], threaten[ing], harass[ing], or in any other manner discriminat[ing] against an employee . . . to provide information . . . regarding any conduct which the employee reasonable believes constitutes a violation of [a federal fraud statute], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal Law relating to fraud against shareholders.” The employee’s prima facie discrimination case must show that (1) the employee engaged in a protected activity, (2) the company knew or suspected, actually or constructively, that the employee engaged in the protected activity, (3) the employee suffered an unfavorable personnel action and (4) the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action. After an employee makes out a prima facie case of retaliatory discrimination, an employer must demonstrate that it would have taken the same adverse employment action in the absence of the plaintiffs’ protected activity.

Similarly, Dodd-Frank provides protection to whistleblowers from employers who might retaliate against individuals reporting original information to the SEC. One recent case suggests that even internal complaints that are not reported to the SEC may be protected activity under Dodd-Frank. Additionally, rules promulgated under Dodd-Frank enable the SEC to bring whistleblower retaliation claims. However, according to reports of recent public remarks by an Associate Director in the SEC’s Enforcement Division, it is not the intent of the program to protect employees whose companies have legitimate reasons to fire them, and the SEC has not yet brought a whistleblower retaliation action. Nevertheless, the SEC’s forbearance to date should not be interpreted as an unwillingness to use its new authority.

Recent cases highlight evolving law around “whistleblowers” and “retaliation”

Two recent federal court whistleblower retaliation cases highlight the uncertain, evolving nature of the law in this area.

In April, a Los Angeles judge dismissed a whistleblower’s retaliation claims based on the California Labor Code but proceeded on claims involving the same conduct under the SOX anti-retaliation provisions. The employee alleged that she was terminated from her position as company controller after refusing a request to accrue US$1 million in discretionary bonuses for certain officers without board approval and reporting the request to the General Counsel and outside SEC counsel.

The court concluded that the employee sufficiently alleged a reasonable belief that her disclosures related to a violation of SEC rules and regulations. But because she did not allege that actually accruing the bonuses would be illegal, the court dismissed her California state law claims.

A month later, a federal court in New York similarly refused to dismiss an employee’s SOX and Dodd-Frank retaliation claims against a Spanish information technology company. The employee alleged that the company marginalized him after reporting a purported scheme to inflate overhead rates in connection with a public contract bid. Despite the fact that the final bid did not involve the allegedly deceptive overhead rates and the employee was never sure whether the scheme was illegal or fraudulent, the court permitted the employee’s claims to proceed to trial. The employee’s reasonable belief that the conduct constituted a violation of federal law was enough to allow the jury to decide whether his concerns were protected activity under SOX.

Both of these recent cases turned on whether an employer dismissed an employee for reporting misconduct and whether the employee reasonably believed such misconduct was illegal. In both instances, the employee’s Dodd-Frank and/or SOX anti-retaliation claims survived, even over retaliation claims rooted in California’s employment statutes.

Employers should take enhanced care when contemplating adverse action against an employee who may qualify for whistleblower status. The following are recommended:

Train human resources and managers to:

identify employees who may qualify for new whistleblower protections and evaluate carefully whether the adverse action is or may be perceived as retaliatory and

provide coaching and document performance issues on a real-time basis and communicate clearly and candidly with employees about why decisions are being made (to avoid retaliation claims by having a properly documented rationale and timeline of events).

Implement internal controls and procedures to ensure that:

complaints are reported and addressed properly, including procedures for escalation from a point of intake (such as a hotline, supervisory or human resources personnel) to internal compliance, legal and board of directors when appropriate

final decision-makers and human resources personnel who are overseeing the adverse action have all of the facts related to the employee in question (different departments may possess different information – therefore, facilitate information sharing among departments)

employee issues are promptly and thoroughly investigated to ensure all relevant information has been discovered, so that sound decisions, and proper determination of whether an employee is protected or not, may be made and

in-house or outside legal counsel are consulted at the outset of an employee issue to help reduce exposure.